Bank Analysis School eBook

APPENDIX A: INVESTMENT TERMINOLOGY It is important to understand key investment terms to analyze a bank’s securities inventory and other investment reports. Below are some common terms related to debt securities.

• Bonds that could be sold before they mature. AFS bonds are reported at their market value, but changes in value don't affect earnings unless the bond is sold.

Available-for-Sale (AFS)

• Bonds that an investor intends to hold until they mature. HTM bonds are reported at their amortized cost and aren’t affected by market price changes.

Held-to-Maturity (HTM)

• Dollar value of a security as stated by the issuer on the “face” of the instrument. For bonds that mature at a single point in time, this is the principal amount due at maturity.

Par Value (Face Value)

• Reflects the original price paid for a bond and any discount accretion or premium amortization over time. Held-to-maturity bonds are reported at amortized cost.

Amortized Cost (Book Value)

• Current price at which a bond could be bought or sold. Quoted market prices are the best indication of fair value. Available-for-sale bonds are reported at market value.

Market Value (Fair Value)

• Amount by which the price paid for a bond is lower than the par value. This amount is gradually recognized as income (accreted) over the life of the bond.

Discount

• Amount by which the price paid for a bond is higher than the par value. This amount is amortized as an expense over the life of the bond.

Premium

Coupon Rate

• The annual interest rate paid to the investor, experessed as a percentage of the par value.

Yield-to-Maturity

• Overall return to the investor, factoring in any premium or discount.

• Weighted average time until a bond's cash flows are received. Duration is used to measure a bond's price sensitivity to interest rate changes.

Duration